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Economy & Business
A Rise after Seven Years
The government proposes an increase in the basic electricity tariff of 15 percent. If the proposal is rejected by the House of Representatives, then the subsidies will swell to Rp63.1 trillion.
HARRY Azhar Azis was very angry when he heard that the government wanted to increase the basic electricity tariff by 15 percent. This Chairman of the Budgetary Committee at the House of Representatives (DPR) was amazed because the government had already asked for additional electricity subsidies of Rp16.7 trillion in the Revised 2010 State Budget (APBN) Draft Bill that was presented two weeks ago.
In the 2010 APBN State Decree, the state-owned electricity company PLN had already obtained electricity subsidies amounting to Rp37.8 trillion. So, if this addition is approved by the DPR, then the subsidies for PLN will rise to Rp54.5 trillion. What’s more, even though the DPR has not yet made a decision on the additional electricity subsidies, the government has already put forward another new proposal: to increase the basic electricity tariff by 15 percent. “What does this government want? Wasn’t the additional Rp16.7 trillion enough? Now it needs to increase the price?” Harry asked.
In addition, it was not the Minister of Energy & Mineral Resources, Darwin Zahedy Saleh, who announced the increase in the electricity basic tariff. “Where’s the Energy & Mineral Resources Minister? Will the Minister of Finance be doing the explaining?” he said. What has made Harry so angry is the way in which the government is conveying things in pieces. Policy measures regarding the 6,600VA electricity tariff are not yet complete, but even so there has already been a request for additional subsidies, and now this proposal. The impression is that the government does not have any long-term plans. “This is not professional,” he said.
According to Finance Minister Sri Mulyani Indrawati, this plan to increase the tariff is one packet with the request for increased electricity subsidies and this was put forward together with the 2010 APBN changes draft bill. The plan is that the 2010 APBN will be debated in April after DPR members have returned from their recess. If it is approved by the DPR, then the government will increase the basic electricity rate by around 15 percent this coming July.
The reason for this is that electricity subsidies are becoming larger. Currently, almost all customers are subsidized, including customers with large electricity supplies. PLN can say that it is unable to make any investments because its profit margin is extremely thin. In fact, PLN has to pay for fuels at market prices. The last time the electricity tariff was increased was seven years ago. Back in 2003, the average electricity tariff was raised to Rp550.74 per kWh from the previous Rp44.03 kWh.
If the DPR were to decline this increase, according to Sri Mulyani, electricity subsidies would swell to Rp63.1 trillion. “If declined, additional subsidies could amount to Rp8.6 trillion,” said Minister Sri Mulyani in a limited discussion with economic analysts and editors in Jakarta, on Thursday last week.
The government has in fact already prepared scenarios in case the requested electricity tariff increase is declined. First, the government will ask for the DPR’s approval to increase the budget deficit from the 2010 APBN changes draft bill of 2.1 percent to around 2.2 percent. Second, if the DPR does not approve an increase in the budget deficit, then the government will cut the budget allocations to several ministries and agencies. Then these funds would be moved in order to cover the deficiencies in the electricity subsidies.
The government is pretending that this is not a sudden proposal. State Decree 47/2009 on APBN 2010 already indicated the possibility of a change in the basic electricity tariff. A former PLN Director, Fachmi Mochtar, put forward a request to increase the basic electricity tariff in the second quarter of last year.
At that time the government, and also PLN, put forward three scenarios to DPR members for tariff increases: an increase of 10 percent, 20 percent, or 30 percent. A fluctuating oil price and the dependence of electricity power plants on oil-based fuels made the country have a heavy subsidies burden. This had become like an annual disease because production costs are triggered by market prices, while sales prices are fixed.
In one follows this legal umbrella, then the basic electricity tariff should have been increased at the beginning of this year. “But we deferred the increase of the basic electricity tariff because the recovery of the 2008 global economic crisis had not been fully felt by the general public,” said Sri Mulyani.
Head of the Fiscal Policy Board, Anggito Abimanyu, added that the basic electricity tariff increase will be applied to all classes of customers. But the amount of the increase for each class will be debated by the DPR. According to him, the amount of the 15 percent average increase had already been calculated based on the buying power of the public. “We can protect the lower class groups of the public. Those who are capable of paying have to pay approaching the commercial price,” he said.
The government has certainly chosen a scenario to transfer subsidies by stages. Consumers who are not capable will still receive subsidies. On the other hand, upper classes will be pushed to pay electricity prices at non-subsidy prices. By 2014, only small customers with small supplies such as 450VA and 900VA will still receive subsidies. Several customers with supplies of 6,600VA have already had their subsidies removed since January this year. If customers use electricity above the 50 percent national average per group or more than 600 kWh, they will be charged the commercial price.
Minister Darwin Zahedy Saleh has acknowledged that he does not yet know the details of the amount of the cuts in the electricity subsidies. He also does not know which groups will still receive subsidies. He is only convinced that the plan to increase the basic electricity tariff will take into account the purchasing power of the public. Certain groups will still receive subsidies. “So this will be extremely careful,” said Darwin.
IT seems as if the subsidies burden is not one of the reasons. Investment is an accompanying reason, preparation for electricity infrastructure to meet increasing national electricity requirements. In the next 10 years, it is expected that electricity demand will grow by 9.17 percent on average. Electricity sales will more than double by 2018, from 121 TWh in 2007 to 239 TWh in 2018. This year also, the target is that 88.5 percent of households in Indonesia will be connected to electricity. Currently only 62.4 percent of households are already connected to electricity. This project requires a flow of fresh funds. Up until now, it is recorded that several PLN projects have experienced difficulties in obtaining bank loans because PLN’s balance sheet is still in the red. Take a look at PLN’s financial reports from 2004 to 2008. In 2004 there were losses of Rp2.02 trillion, in 2005 there were losses again, higher at Rp4.9 trillion, in 2006 losses dropped to Rp1.9 trillion, and in 2007 losses rose again to Rp12 trillion because of rocketing oil prices. It is expected that only in 2009 will PLN be able to declare a profit because oil prices dropped slightly. In the first quarter it is predicted that profit will amount to Rp6.26 trillion. This unpleasant financial report performance has resulted in the first stage of the 10,000 MW power plant project being blocked repeatedly. PLN has had real difficulties in seeking loans. And even if there were any, banking syndicates would demand various sureties. It is because of this that the government has increased the (profit) margin from 5 to 8 percent on basic production costs. Darwin hopes that the increased margin will make it easier for PLN as regards dealing with banks. “This increase will be used by the company for investment and goods procurement. So, if there are any damages, there will not be any long waits,” said Darwin. Dahlan Iskan, a Director of PLN, agreed. The increases in the basic electricity tariff and the margin will help PLN grow and be able to invest. The margin increase will help PLN obtain loans for projects, one of which is the second stage of the 10,000 MW power plant project. Dahlan added that the company had the opportunity of obtaining this margin of 8 percent for the next two years, at the very least. Once the target had been achieved, then the margin could go back down to 3 percent. “Our target is not to have any more blackouts and to economize on fuel usage,” said Dahlan. The Indonesian Consumers Foundation (YLKI), which usually does not agree with electricity tariff increases, this time supports PLN. Tulus Abadi, a member of YLKI, said that the public’s consumption methods of electricity needed to be changed. “The public needs to learn how to use electricity rationally,” he said. Against the increase is the industrial sector. Minister of Industry, M.S. Hidayat, has already received reports of objections. “This goes against the national program to increase industrial competitiveness. And what’s more, industries are currently having to face up to the free trade agreement,” said Hidayat. This increase in the basic electricity tariff, he said, automatically increased production costs. And if production costs go up, then sales prices will too. How will it be possible to compete with Chinese products that are much cheaper? According to him, if other government agencies cannot help the program to increase industrial competitiveness, then don’t issue policies that are weakening. “I will talk with PLN in order to put forward a possible proposal for tariff diversification, so that there are different tariffs for industries. So that the increase is only for consumptive customers, not industries,” said Hidayat. Harry Azhar Azis also questioned the increase of 15 percent to the basic electricity tariff. He asked for detailed and transparent price calculations. “Is there a guarantee that there will be no more blackouts?” he asked. According to him, it is not fair if PLN continues to burden customers with inefficiencies in its operations. “It must be fair for both parties. If PLN wants to increase tariffs, then I will also request an investigative audit of PLN. This is to see if PLN’s performance is efficient or not,” he said. Head of Research at the Danareksa Research Institute, Purbaya Yudhi Sadewa, said that the choice of increasing electricity tariffs was not that oil-based fuel prices were precise. He had made rough calculations that showed a 15 percent basic electricity tariff increase had the opportunity of an inflationary increase of 0.3 percent, while a 10 percent increase in oil-based fuel prices would result in an inflation rise of 0.7 percent. This inflationary rise of 0.3 percent was the worst scenario. “It will happen. Members of the public will panic at the increase of the basic electricity tariff,” he said. Purbaya was also not convinced that the increase in the basic electricity tariff would make producers increase their selling prices. The problem was that in the production of a product, electricity costs only amounted to 10 percent of component costs. So, an increase in the basic electricity tariff of 15 percent will only cause an additional 1.5 percent in production costs. In the end, the decision to increase the basic electricity tariff will be in the hands of DPR members in meetings next month. Clause 8 of the 2010 State Budget state decree states that the government will determine the basic electricity tariff after receiving DPR approval. If there is no approval, as stated by the Finance Minister, the choice will be an increased budget deficit or a cut in ministerial budget allocations. Harry expects that the decision will not be made before the beginning of May. This will be the last day of the scheduled budget meetings. Nieke Indrietta and Padjar Iswara
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